PATTON
ADDRESS
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TO THE
Voters of the 6th Congressional District
of California
ON
The O^vnersliip of the Pacific Rail-
roads by the Governmeiit
AND
The Location of a Deep Sea Harbor
at San Pedro
BY
aEO. S. P^TTON,
Democratic Nominee for Congress,
Sixth District,
TO WHICH IS ADDKD
An Abstract of the Reports of the United States
Pacific Railway Commission, under Act
of Congress of March S, 1887,
WITH
* Suggestions as to the Legal Remedies of the Gov-
ernment for the Recovery of its Debt.
Kinsell & Doan, Printers and Publishers,
311 New High St., Los Angeles,
California.
lOitfo tAt ^(yni/fihtOmbrbt^ oj Sm. ^. S^attan
m
ADDRESS
To the Vcters of the Sixth Congressional District: jJljffl
—■ •■»
Fellow Citizens: The Republican press and speakers assert
that there is no railroad issue in California this year. To make
this appear they vociferously declare, although their platform
is altogether silent upon the subject, that they, as well as
the Democrats, are infavor of compelling payment of the Gov-
ernment debt by the Pacific Railroad Companies ; and hence,
they would have you infer, notwithstanding the significant sil-
ence of their platform, that they are at one with the Democratic
party in their adverse attitude towards the Pacific Railroad
companies, and especially the Southern Pacific.
That this is undoubtedly true of the voting masses of
the Republican party, and that they, like their Democratic
fellow citizens, are opposed to the further domination of
the State by the Railroad corporation, is freely admitted.
But the voice of this element has been stifled by the un-
scrupulous political ' * boss' ' now in control of the party, and
finds no utterance in the platform put forth as the declaration
of party principles — an omission which the press and candidates
of that party seek to remedy by deluding their hearers with the
glittering generalities to which I have alluded.
How far these declarations fall short of the necessities of the
case, and of the bold and radical stand taken by the Demo-
cratic party, I shall endeavor to show. But to do this it will
be necessary first, to recount briefly, the history of the con-
struction and financial management of the Pacific Railroads ;
which, as known to all, has resulted on the one hand in the
apparent insolvency of the railroad companies and their con-
sequent inability to pay their immense indebtedness to the
Government, and on the other in the unprecedented enrich-
ment of the individual directors.
The story is given at length in the report of ' 'the United
States Railway Commission," appointed under the Act of
March, 1887, to investigate the subject, and, as there told must
be accepted by all as authentic. It is too long for recital in all
its details in the limits of a single speech or address, and I am,
— 4—
therefore, compelled to confine myself to a mere statement of
the general results reported by the Commissioners ; but to give
to all who may desire to pursue the inquiry for themselves an
opportunity to do so, I have had prepared and append to this ad-
dress an abstract of the reports of the Commission, which I earn-
estly recommend to your attention. The perusal of this abstract
or of the reports of the Commission will, I am sure, be found
interesting, and, to those not familiar with the methods by
which the Pacific Railroad Companies have been looted by
their directors, even startling. It is the story of a few men ot
moderate means, who, taking advantage of the generosit}- of
the Government, have, by the most open and unblushing
fraud, become, in a few years, the possessors of untold wealth,
and the political arbiters of the destinies of this and of other
Western States. And if you will read the abstract of the
reports hereto appended, and consider to what extent the indus-
tries of the State o'^ California have been burdened and op-
pressed, and the wealth of its people diverted into the pockets
of these fortunate individuals, you will be at a loss to account
for the patient submission of the people to the misconduct of
their officials, through whose neglect or corruption the Govern-
ment has been robbed.
The pending issue between the parties arises upon the question
of the respective methods proposed for treating the indebtedness
of these roads to the Government; and to understand this it will
be necessary to explain the history of the construction of the
Pacific Railroads and of their subsequent financial management,
the exisiting status of their indebtedness to the United States
and their present financial condition. The subject will be
considered in the order stated.
The general methods of construction adopted by all the
Pacific Railroad Companies was for the directors to let the con-
tracts for construction to auxiliary corporations in which they
were the sole parties in interest, and to pay to such companies
or in other words to themselves, for the construction, all
of the bonds and all of the stock, thus pocketing as clear
profits the difference — in all cases excessive — between the
the amounts thus paid and the actual cost of construction. On i
this point I commend to your attention the interesting observa-
tions of the Commissioners, which will be found on pp. 7 and 8
of the appended abstract, where these methods are explained at
greater length.
The Central Pacific and the Union Pacific Railroad Com-
panies, as now constituted, consist each of the original subsi-
dized lines and of several important branch lines built by and
consolidated with them.
In the construction of the subsidized portions of the roads
the general result was that the roads were actually built and
— 5—
equipped for less than the amount of the Government bonds
and the first mortgage bonds, and that the directors and stock-
holders of the construction companies received for the con-
struction, the balance of the bonds, and the whole of the stock
and land grant ; and with reference to the branch roads the
general methods were the same.
The profits realized by the directors are detailed by the
Commissioners in the tables appearing on pages 13 and 15 of
the abstract, which are here reproduced.
The directors of the Central Pacific Railroad received for
this construction :
In cash $41,573,719.47
In bonds 18,713,000.00
In stocks 60,585,810.22
Total .• $120,872,529.69
Total cost of construction 58,301,831.85
Leaving Surplus profits of $ 62,570,697.84
' ' Of which there were :
Stocks $60,585,810.22
Bonds 1,984.887.62
In the case of the Union Pacific Railroad, the roads
were built and equipped for $38,824,000, and the directors
received in bonds and stock :
First mortgage bonds $ 27,237,000.00
United States bonds 27,236,512.00
Land grant bonds 9,224,000.00
Income bonds 9,355,0B0.00
Stock 36,762,300.00
Total $109,814,812.00 .
Cost of construction $38,824,000.00
Leaving surplus profits of. 170,990,812.00
As to the subsequent management of the Pacific Railroads,
the general result of the facts stated by the Commission-
ers is that all the profits of the roads, which, during a large
part of the time were enormous, were appropriated by the
directors in disregard of the indebtedness of the companies to
the Government.
In the case of the Central Pacific during the years, from
January i, 1874 to January i, 1884, the aggregate net earn-
ings of the company, after deducting operating expenses,
interest and taxes and Government requirements, was
$52,536,916.99, being within $6,000,000.00 of the cost of con-
struction of the road and all its branches, (which was
$58,301,831.85); and there was distributed to the stockholders,
Stanford, Huntington, Hopkins and Crocker, during the same
period in dividends, the sum of $32,308,055.00, being over
$3,000,000 00 per annum, and in the aggregate more than half
the cost of construction. The balance of the net earnings,
— after paying dividends, — amounting to over $20,000,000.00
were used in the construction of branch roads, all of which,
— 6—
the Commissioners report were bonded to their full value;
and, as these bonds, or their proceeds, were received by the
gentlemen named, it may be said that the whole amount of the
net earnings, during this period, $52,500,000.00, were appro-
priated by them. (See Abs. pp. 17-18.)
The earnings of the Union Pacific for the years 1 870-1 883,
inclusive, after deducting operating expenses, amounted to
$103,806,120.16; of which there was distributed as dividends
the sum of $30,585,573.13. (See Abs. p. 18.)
As appears from the reports of the Commissioners the
indebtedness of the Central Pacific Company to the United
States, at the maturity of the bonds, will be $77,995,904.00
less the sum to its credit in the Sinking Fund in the United
States Treasury under the Thurman Act; and its other
bonded indebtedness — all of which constitutes liens on the
branch roads prior to the lien of the United States — amounts
to $62,387,000.00. Hence, in the opinion of the Commission-
ers, as the value of its roads and equipments is less than the last
amount, the Company is entirely insolvent, even with-
out taking in consideration the indebtedness to the Gov-
ernment, and it is clear that this indebtedness cannot
in any way, be collected from the admitted assets of the
Company. The general statements of the Republican nomi-
nees that the debts to the Government, must be paid, are
therefore without significance, unless these gentlemen will tell us
how this immense debt is to be collected out of property whose val-
ue is admittedly less than the amount of prior liens. They should
go further and indicate to us the means by which this desirable
end is to be effected. These means to Democrats are sufficiently
obvious, and the Democratic platform sufficiently outlines them.
They consist in subjecting the personal estates of Stanford,
Crocker, Hopkins and Huntington, fraudulently acquired by
them, to the payment of the debt. That these estates, upon the
admitted facts, and well established principles of law are liable
cannot be doubted. But we have yet to hear of any Repub-
lican orator who has referred to the fraudulent methods by
which the Central Pacific Railroad Company, and its creditor,
the United States, have been defrauded, by the individuals
named, or who has asserted the liability of the fraudulent
appropriators to the company, and indirectly to the Govern-
ment for the whole amount due to it, or has declared that the
Republican Congressional candidates will, if elected, adopt
the finding of the Commissioners and vote for all requisite
means to collect from the fraudulent directors of the Central
Pacific Company, the debt due to the Government.
The present Democratic administration has taken the initial
step to collect this debt; and its action is justified by eminent
legal opinion on the following grounds, viz:
7
That the conduct of the directors was in conflict with the
familiar and well established rule of law which forbids the
directors of corporations or other fiduciaries to deal with the
subject of their trust for their personal advantage, and which
declares such conduct constructively fraudulent, and that all
profits thus realized must inure to the benefit of the bene-
ficiaries.
That the directors were also guilty of actual fraud. For
it was their duty to the company and indirectly to its creditors
and stockholders to procure the performance of the work of
construction and equipment in the most economical manner,
and the extravagant and enormous profits realized by them
cannot be otherwise regarded than as a fraudulent appropria-
tion of the assets of the company.
That the issue of the stock to themselves without money
consideration was itself in direct conflict with the Act of 1864
which forbade payment to be received for stock otherwise than
in gash. Stock thus illegally issued to themselves must,
therefore, under estabHshed rules of law be regarded as held
by them in trust for the companies. This illegal issue of
stock, it is to be observed, was covered up and concealed from
the government by false afiidavits of Stanford and others.
That the issue of enormous sums to themselves by the di-
rectors as dividends was illegal. Independently of other reasons,
as the stock itself was held in trust for the conpanies,
the profits also belonged to them.
That by these fraudulent practices the Union Pacific Rail-
road Company, in 1884, — when a new and better management
of its affairs took place, — was reduced to the verge of insolv-
ency; and the Central Pacific Railroad Company was reduced
to actual insolvency so complete that the subsidized portions
of the roads of this company are asserted by Mr. Hunting-
ton to be worth less than the amount of the first mortgage
bonds. The result, therefore, has been to defraud the
Government by depriving the companies of all means of
paying their indebtedness to it.
A still more serious result is that the roads have
been capitalized at about three times their value; that is to say,
their bonds and stock amount to about three times the actual
cost of construction and equipment; and freights and fares have
been established by the managers of these roads so as to pay
a profit upon all this fictitious capital, and the public has been
thus subjected to a burden of about three times what it ought
to have been subjected to; all of which is clearly shown by
the tables of Gov. Pattison, showing the total amounts re-
ceived for construction, the actual cost, and the resulting
fictitious capital, which will be found on pages 15-17 of the
abstract.
It may be stated here, also, that the Southern Pacific road,
an independent road constructed by practically the same syn-
dicate out of booty derived by its builders from the construction
of the Central Pacific, is bonded and stocked at an average of over
$70,000.00 per mile — and that the best experts claim it could
be built for one third of that sum; and it is upon this fictitious
capital also that the producers of California are taxed in ex-
horbitant freight rates to pay interest.
The case of the Government and of the people against the
Central Pacific Railroad Company and it's fraudulent direc-
tors, Stanford, Crocker, Hopkins and Huntington, as above
stated, rests upon the deliberate findings of the United States
Pacific Railway Commissioners, after an exhaustive investiga-
tion; and a glance at the Abstract appended will be sufficient to
establish the justice of their conclusions.
Stanford and Huntington expressly admit that the stock ol
the company received by the directors for the construction
and equipment of the road — which was all the stock of the
company — was substantially clear profit, and that they paid no
consideration therefore. And in effect they and their associates
admit the whole case in the written argument filed in their
behalf before the Commission ; which, together with the
remarks of the President thereon will be found in the Abstract
on pages 23-4, and is earnestly recommended to your atten-
tion.
The Commissioner (Governor Pattison), states that, had
the roads been built and managed upon honest methods, and
as contemplated by the Government, they could in addition to
enormous profits to themselves have repaid every cent of the
principal and interest advanced by the Government, and re-
duced their charges to shippers to the extent of over $140,-
000,000, or nearly $8,000,000 per year. " But, he says,
they chose dishonest methods. At the outset they di-
vided $172,000,000 of fictitious capital ; they dissipated over
$107,000,000, which should have been applied to the payment
of the principal and interest of the Government debt ; and
they taxed shippers to the extent of $140,000,000, or nearly
$8,000,000 per year, to pay interest upon the fictitious cap-
ital of these companies, and for the vicious practices that crept
into their management."
The people of the State of California find now, at the end
of nearly thirty years, since the inauguration of this enter-
prise, that their side of the account stands thus: Thej' have
paid much the larger portion of the $140,000,000 in the
shape of freight rates to pay interest upon the
fictitious and inflated capital. In addition to this, the roads,
by the payment of $25,000,000 for pools and rebates, have kept
up freight rates to an exhorbitant and unreasonable figure.
— 9—
Among other items, they have paid $4,000,000 alone to the
Pacific Mail Steamship Company, in order to maintain high
rates of freight by the ocean route.
The People of this State have made frequent attempts to
ameliorate their condition, and to regulate freights and fares,
and to compel the railroad company to deal with them justly.
How utterly they have failed in all these attempt is useless for
me to state; it is a fact well known to every Californian. The
only result of these efforts, so far apparent, has been the build-
ing up by the railroad company of a political power in this
State, which has dominated and controlled it for nearly a gen-
eration. In 1880, the people attempted to inaugurate a meas-
ure of control b}'- the establishment of a railroad commission,
and since that period, with the two shining exceptions of
Stoneman and Foote, the railroad company has practically
controlled this commission. It has refused to pay its taxes,
though the largest propert}^ owner in the State, and one for
w^hose protection the greatest public expense is incurred.
Four years ago, in anticipation of the falling due of these
debts, and with the desire and intention of having a represen-
tative of its interests in Congress, it caused to be elected by
the Republican party its own President, and one of the orig-
inal syndicate, Mr. Iceland Stanford, to the position of United
States Senator from California, whose term of office, had he
lived, would have extended over the period during which Con-
gress would be called upon to settle the question. During the
campaign in which Mr. Stanford was elected to that position,
Mr. Morris M. Estee was one of his most vigorous supporters;
and his election cannot be otherwise construed than as a decla-
ration of allegiance by the political managers of that party to
the great corporation over which he presided.
And to-day, realizing to its full extent the significance to
itself of the result of the present election, the Southern Pacific
Company has re-organized its political bureau, and recalled
from retirement and repose the arch-manipulator, whose hand
has been so potent in its behalf in the past, Mr. W. W. Stow,
under whose silent guidance Mr. Daniel M. Burns has been
put in command of the Republican campaign in this State.
Thus, with the assistance of the discarded Democratic "boss,"
Mr. Christopher Buckley, (for many years believed to have
been upon the pay-roll of the Company,) it has seized the Re-
publican organization, nominated a State and Congressional
ticket, and compelled the honest members of the Republican
party to choose between a partisan defeat and a victory for the
use and benefit of the railroad company.
• The method proposed in the platform of the Democratic
party for an settlement of this railroad question constitutes a
clear and distinct issue. The Republican platform is absolutely
lO —
silent upon the question. The Democratic platform declares as
follows :
Whereas, Any extension of time for payment to the Govern-
ment of the Pacific Railroad debts by the so-called Reilly funding bill,
or any other bill having a similar object, would entail upon the people
of this State the principal burden of discharging said debts, and result
only in conferring additional benefits upon the private ovmers of said
roads ; and.
Whereas, The experience of the past has demonstrated the inability
or disinclination of said roads to discharge their just obligations ; and,
Whereas, Every principle of justice and expediency demands that
the mortgage bonds of said roads should be paid or foreclosed at maturity ;
therefore,
Resolved, That each and every one of our nominees for Congress
shall immediately after his nomination subscribe to and deposit with
the Chairman of the State Central Committee a written pledge in the
following words : "If elected to Congress I will oppose any attempt and
vote against any bill to extend the time for payment to the Government
of Pacific Railroad debts, and I will favor and vote for a measure to fore-
close at maturity the lien of the Government on these roads, and to have
them bid in by the Government, and maintained as national highways-
for the benefit and interest of the people, and to enforce against the
stockholders of said roads the collection of any judgment for deficiency
that may result upon said foreclosure ; and I will favor and vote for all
legislation necessary to effectuate these ends."
It is true that Mr. Estee has declared that, notwithstanding
the omission in his own platform, he is in favor of compelling
the payment of the Government debts, and if necessary of tak-
ing the roads ; but that this is not the sentiment of other lead-
ers of the party is shown by the fact that Mr. Grove L. John-
son, its noininee for Congress in the Sacramento District, the
reputed author of its platform, and a gentleman who is con-
fessedly one of the first of the Republican leaders in this
State, declared, in a speech at Sacramento the other day, that
while he was in favor of compelling the payment of the rail-
road debt, he was not in favor of the Governmental ownership
of railroads ; that it was not practicable ; that he did not want
the Government to go into the business of owning railroads,
unless it was absolutely necessary. And Mr. James McLach-
lan, its nominee in the Sixth District, only goes so far as to
declare (I quote from his speech at Ventura): "All of the
parties are agreed that that debt must be paid without delay.
This is the position taken by the Republican party ; it is the
position urged by Mr. Estee ; and I say, as the Republican
nominee from this District, that the railroads must pay with-
out delay." But nowhere does he suggest how this is to be
accomplished.
The Democratic position, upon the other hand, is clear and
emphatic in pointing out the remedy which must be adopted,
and that remedy consists in the foreclosure of the lien of the
Government on these roads, and the buying them in by the
Government, to be maintained thereafter as national highways
— II —
for the benefit and in the interest of the people ; and in enforcing
against the stockholders and fraudulent directors the judgment
for deficiency.
The plan suggested is for the Government to retain the
ownership of the railroads, and to maintain them as common
highways for all railroad companies that may desire to
pass their trains over them, subject to proper regulations gov-
erning the passage of trains, and upon terms which would pay
a reasonable interest upon the actual value of the road, and
not upon a fictitious value. The result of this plan, (of which
I do not enter into the details) would be to establish what
twenty years of legislative attempts at railroad control has
failed to effect. It would regulate the rates of freight upon all
other transcontinental roads. It would compel, for instance,,
the Southern Pacific Company to reduce its rates over its South-
ern Pacific line to an extent which would pay interest only
upon the actual value of the road; which could be dupli-
cated today for about one-third of the amount at which it is
capitalized. The bonds and stock of the Southern Pacific
Railroad Companies average over $70,000 per mile of road ;
and it is to pay interest upon this fictitious valuation that the
shippers of California are charged freight rates which have
brought the agricultural and industrial aflairs of this State to
the verge of runin. In my own neighborhood, in the San
Gabriel Valley, two years ago, the average rate of freight per
acre for all the orange orchards paid to convey the crop to
market, was $250 ; and one orchard of eight acres in that year
actually paid $648 per acre in freight rates to move its orange
crop. The amount of reduction which would be implied in
a freight rate based upon the actual value of the railroad, in-
stead of its present inflated value, would reduce these rates
at least two-thirds or 66 per cent. ; and the producers of Cali-
fornia know full well that the time has come when we must
not only have a reduction of freight rates, but we must have
a very radical reduction of them, in order to survive.
The remedy proposed by the Democratic platform, is to
bid in the roads, and to docket a deficiency judgment for the
balance of the debt; and in pursuance of this polic>'
the Democratic attorney general has already filed his
claim against the estate of Mr. Iceland Stanford for
$15,000,000, and that suit will doubtless be pushed by the
Democratic administration to a successful conclusion. Upon
the same principle, suits will be instituted at the proper time
against the other stockholders and fraudulent directors of that
company, for their proportionate shares of the immense de-
ficiency judgment which will result in favor of the United
States after the foreclosure. The issue, then, is clear and dis-
tinct. Are Mr. Estee and Mr. McLachlan, and other candi-
— 12—
dates upon the Republican ticket, prepared to adopt the con-
clusion of the Pacific Railway Commissioners, and declare that
Messrs. Huntington, Stanford, Crocker and Hopkins have
been guilty of a fraudulent conversion of the assets of the com-
pany of which they were directors? Will the Congress-
ional nominees of the Republican party pledge themselves to
vote for all necessary legislation to prevem these individuals
from parting with their portable assets pending a settlement of
this question, and to enforce the collection of the Government
debt against their personal estates. And will they vote
against the proposition of Senator Hoar, of Massachusetts,
which proposes to remit the Government claim to the Stanford
estate, and necessarily to remit by so doing its claim against
the other members of the syndicate?
Mr. Kstee undertakes to explain the silence of his party
platform by stating that, at the date of its adoption, the Reilley
bill, proposing to extend the time of payment, had not been
reported. To make this plea successful, Mr. Estee must plead
an ignorance of public questions of which no one who knows his
ability can believe him capable. The question of the disposi-
tion of this railroad debt has been a live one for at least four
years, and during the last campaign, when Mr. Estee was
stumping the State for Stanford, it was repeatedly and openly
charged that Mr, Stanford's desire to go to the Senate arose
from the fact that his Company wanted a representative in that
body when this question of the railroad debt should come up,
as it necessarily would during his term of office.
In connection with the question of Government ownership,
I may remark that the idea of ownership of certain trunk lines
of railroad by the Government is not a new one. More than
twenty years ago, a commission of the Senate was appointed to
investigate the subject of transportation between the Missis-
sippi Valley and the sea-board, with a view to regulating the
rates of freight and fare, and was charged specially with the
consideration of two alternative plans, the one of a railroad
operated by the Government, and the other of a line of water
communication. They reported in favor of the latter, and
recommended the improvement of the Ohio and Mississippi
rivers, and the construction of a canal from the
Kanawha, to the James river, at an estimated cost
of about |6o,ooo,ooo. Such a line of communica-
tion, they reported, would effectuallj^ regulate the rates of
freight from the Mississippi to the sea-board; and it was their
opinion, based upon the experience of the Erie canal, that the
saving in freights upon the wheat crops of a few years would
more than repay the whole amount invested. In the East, un-
der the influence of a number of competing roads and markets,
freights and fares have been more or less effectually regulated,
—13—
but West of the Mississippi, the case is entirely different.
It is well also to remember that Mr. Budd, now the Demo-
cratic nominee for Governor, twelve years ago, when a mem-
ber of Congress, ably advocated the Government ownership of
these very Pacific roads, thus blazing the way for the position
now assumed by the party.
The adoption of the plan outlined and suggested by the
Democratic platform, and to which its nominess are pledged,
will undoubtedly result in the immediate construction of
another railroad, connecting the main line at Ogden, and run-
ning thence through Salt Lake City, traversing the great coal
fields of South Utah and reaching a deep water terminus upon
the coast of Southern California. And this brings me to the
consideration of another question of vital importance to the
people of this district in particular, and of California as a whole,
and that is the question of the location of a deep-sea harbor.
As is well known, for a number of years the Southern Pacific
Company had its terminus upon this coast at San Pedro. Dur-
ing this period it acquired the ov/nership of the Santa Monica
road and wharf, which had been constructed by Senator Jones
of Nevada, with the audacious view of entering into competi-
tion with the Southern Pacific Company. Upon the acquisition
of this road and wharf, the first step of the Southern Pacific
Company was to suffer the wharf to be destroyed and to con-
centrate all of its cpmmercial business at San Pedro. It then
began to urge, both here and in Congress, the construction of
an adequate harbor at San Pedro. The people of Southern
California unanimously concurred with it in this desire, and
rejoiced that the interests of this great corporation were for once
consonant with their own ; and the result was, that the Gov-
ernment finally determined to build such a harbor, and in 1890
a commission of engineers reported the detailed plans and speci-
fications for a deep-sea harbor at San Pedro, stating that such a
harbor, taken in connection with the present inner harbor at
that point, which had been constructed by the Government at a
cost of nearly a million dollars, would supply, for all future
time, adequate harbor facilities for the southwest portion of the
United States. Acting upon the assumption that the construc-
tion of this harbor would begin, Eastern capital sought an
investment here, and a corporation was organized, purchased
adequate terminal facilities at the proposed harbor, and con-
structed, at a cost of several million dollars, a railroad, con-
necting the same with the city of Los Angeles ; and this road
constitutes, and was designed to constitute, a railroad terminal
for other competing transcontinental railroads. As soon as this
was done, an entire change came over the spirit of the
Southern Pacific Company. It first secured the con-
trol by itself and Senator Jones of Nevada, who is a
—14
member of the Senate Committee on Commerce, of the
whole ocean front of the bay at Santa Monica. When this
was done, it declared that San Pedro was not a proper site for
a harbor, and that if one was to be constructed by the Govern-
ment," its new location at Santa Monica was the only place
suitable ; and, thus by its ofi&cious interference, as was ex-
pressly asserted by Senator Felton, it prevented an appropria-
tion, which would otherwise have been made several years ago.
It requested the appointment of another commission to exam-
ine and report upon the relative merits of San Pedro and the
new Santa Monica location. That commission was appointed,
consisting of five of the first engineer officers of the United
States army ; and, after a thorough and critical examination
it unanimously reported in favor of the location at San Pedro.
It declared that that site was superior to the site at Santa Mon-
ica, in almost every respect, both as regards its adaptability as
a harbor, and its defensibility in case of war. It pointed out the
fact that at Santa Monica it was necessary to construct wharves
nearly 5000 feet long, and at a cost of about $1,000,000 each
to reach a depth of water suflGicient for the accommodation of a
deep-sea vessel ; that such wharves would have to be maintained
and practically rebuilt every few years, at enormous cost, and
that the rates of wharfage and toll would necessarily be placed
at a figure to cover all this expense, and would hence be paid
by the people. Whereas, at San Pedro,, the breakwater pro-
posed to be built communicated directly with the shore, and the
plan was suggested that upon this breakwater a double
track railroad should be built, and that along the whole of
its face numerous wharves could be constructed at small
cost for construction and maintenance, connected by
proper switching facilities, with the railroad track upon the
breakwater itself ; which would insure the people what they de-
sire— competition. In addition to this, in the opinion of the
Engineers, one of the most essential adjuncts of a harbor was
an area of flat and marshy land adjoining it, which might be
utilized by dredging for the construction of dry-docks, ship-
yards, and repair shops. A condition that existed in an em-
inent degree at San Pedro, and was entirely wanting at Santa
Monica. Numerous other advantages of the former, over the
latter location, were also pointed out by the Commissioners —
as for instance: the obvious advantage of the inner harbor
already constructed, and the greater depth of water near the
shore, and the larger protected area.
Notwithstanding this report, which had been requested by it,
the Southern Pacific Company has refused to abide by the re-
commendation of the Commission; and during the last session
of Congress, Mr. C. P. Huntington in person, and assisted by
his resident lobbyist in Washington, and by a labored argument
—15—
volunteered by one Mr. E- E. Corthell — who admitted that he
was in the employ of Mr. Huntington, and whose testimony is
therefore simply that of a hired expert — after weeks of effort
finally succeeded in again delaying the commencement of this
work which is so essential to the prosperity of this people. As
a delegate trom the Chamber of Commerce I was before that
committee, and it is my opinion from what I there saw, that
the Southern Pacific Company and Mr. Huntington do not de-
sire the construction of a deep-sea harbor upon this coast at all,
for at least some years to come; auvi they are resolved it shall
be constructed at a point which is controlled and monopolized
by themselves, and otherwise not all.
The question then is, do the people of this State desire to
entrust the solution of the pending questions of a Government
highway across the continent, and of a free harbor for the
people to the nominees of a party whose platform is silent upon
both points ; whose controlling spirit is Mr. Daniel Burns of
San Francisco ; and who four short years ago actually sent to
the Senate of the United States as its chosen representative the
president of the great corporation whose interests are involved.
Is it not possible that the honest members of the Republican
party — and by that I mean the whole mass of the party, leav-
ing out its present corrupt leadership — are being deceived upon
this question ; or at least that their leaders are seeking to de-
ceive them'?
My belief is, that the time has come when the people
of California must shake from their limbs the shackles
of the commercial slavery imposed upon them by this corpor-
ation, or consent that hereafter they shall remain at sufferance
upon territory owned by it. Many conservative men declare
that they fear the inauguration of a step so radical as the owner-
ship of the railroads by the Government. But there are occa-
sions when new conditions must be met by new remedies.
There is but one safe rule to follow in this matter, and that is
that the welfare of the people is the supreme law ; and
that whatever our general views of expediency in regard
to minor matters, such as the operation of the railroads, or
other industrial enterprises, by the Government, they must give-
way to the higher principle when necessity demands. If the
people of the State of California are in earnest, and mean what
they have said by their signature to the great petition which
has been circulated against the refunding of the railroad debt,
they will seize this opportunity, which is the first chat has
been presented in many years, and which may be the last for
years to come, and shake off their fetters. If they do this,
with the construction of other roads which shall connect with
this new Government road, the State of California will be made
the terminus of all roads to the East ; and, with the construe-
i6—
tion of the Nicaragua Canal — which is regarded as a mere ques-
tion of time — and with a free and unrestricted harbor open to
the commercial competition of all, at San Pedro, we shall enter
upon an era of prosperity far greater and more lasting than
that which was enjoyed when the gold mines of California
were pouring out their countless streams of wealth. If this is
done, then ourselves and future generations will be entitled to
celebrate this event as one of the most glorious epochs in our
history.
Your Obedient Servant,
GEO. S. PATTON.
THE
PACIFIC RAILROAD COMPANIES
THEIR METHODS OF CONSTRUCTION AND FINAN
CIAL MANAGEMENT
AND
THEIR INDEBTEDNESS TO THE UNITED STATES AND
PRESENT FINANCIAL CONDITION
AS SHOWN BY THE
REPORTS OF THE UNITED STATES PACIFIC RAILWAY
COMMISSION, APPOINTED BY PRESIDENT
CLEVELAND UNDER THE ACT OF
CONGRESS OF MARCH 3, 1887,
WITH
OBSERVATIONS UPON THE LEGAL REMEDIES OF THE GOVERN-
MENT FOR THE Recovery of the Money Due
FROM THE Pacific Railway Companies.
TABLE OF CONTENTS.
INTRODUCTION Page 3
I.
HITSORY OF THE CONSTRUCTION AND vSUBSKQUENT
FINANCIAL MANAGEMENT OF THE PACIFIC RAILROADS.
(i) Nature and Amount of Government Aid to Construction 4
( 2) Methods of Construction : 7
Their General Character 7
Construction of Central Pacific R. R. and Branches, viz:... 8
Main line, Sacramento to Ogden 8
Western Pacific R. R 6
San Joaquin Valley R. R 10
California and Oregon R. R 10
Recapitulation 11
Construction of Union Pacific R. R. and Branches, viz: 13
Construction of Central Branch of U. P. R. R 14
Construction of Sioux City & Pacific R. R 15
Comparison of Capitalization snd Actual Cost of Pacific
Railroads generally 15
Unauthorized Issue of Stock 17
(3) Subsequent Financial Management of Pacific Railroads 17
II.
INDEBTEDNESS OF THE PACIFIC RAILROAD COMPANIES
TO THE GOVERNMENT AND THEIR PRESENT
FINANCIAL CONDITION.
(r) Indebtedness to Government 18
(2) Liabilities generally 19
(3) Assets 19
III.
LEGAL REMEDIES OF THE GOVERNMENT FOR THE RE-
COVERY OF ITS DEBT 2T
INTRODUCTION.
In the year 1887, an Act of Congress was passed " author-
izing an investigation of the books, accounts and methods of
railroads which have received aid from the United States," and
providing among other things for the appointment by the
President of a Commission for that purpose. The Commis-
sioners appointed were, the Hon. Robert E. Pattison
of Pennsylvania, the Hon. Ellery Anderson of New
York, and the Hon. David T. Littler of New York, gentlemen
— as shown by their reports — eminently qualified for the per-
formance of the difficult and responsible duties assigned to
them. By these gentlemen, and an able corps of expert
accountants and railroad men. a protracted and exhaustive in-
vestigation was made ; and their reports made in accordance
therewith may be regarded as constituting the only complete
and authentic history of the bond-aided railroad companies.
These reports consist of a majority report by Messrs.
Anderson and Littler, and a minority report by Governor Pat-
tison. The former recommends, in substance, an extension of
the time of payment, upon certain conditions, for the term of
fifty years ; the latter, a suit for the forfeiture of the charters
of the companies, and a winding up of their affairs. Neither
scheme was adopted by Congress, and the whole matter fell
into abeyance until the introduction of the bill now pending in
Congress, which in effect provides for an extension of time for
payment for fifty years, and a reduction of the interest to three
per cent.
The magnitude of the interests involved in this bill — as
affecting the public generally and more especially the people of
the trans- Mississippi States — renders it perhaps the most
vitally important measure — at least to the latter — that Con-
gress has ever had to pass upon ; and on this account, the
reports of the Commissioners have come, at the present time,
to have a peculiar value, as being the only record — or at least
the only accessible record — of the facts by which the justice
and expediency of the proposed bill are to be judged.
Unfortunately, a few copies only of the report remain extant ;
but the following compilation, it is believed, will present fully
all that is material to the questions pending between the Gov-
erntLent and the companies.
— 4—
The majority and the minority reports of the Commission,
though differing in the methods of adjustment proposed and in
arrangement, in other respects agree, substantially, with each-
other, and contain much the same matter. To avoid repetition,
the two reports will be consolidated in this compilation ; and
the subjects treated of will be distributed in the following order :
(i) History of the construction and of the subsequent
financial management of the Pacific railroads.
(2) Statement of their indebtedness to the United States,
and of their present financial condition.
(3) The legal remedies of the Government for the recov-
ery of the debt.
HISTORY OF THE CONSTRUCTION, AND OF THE
FINANCIAL MANAGEMENT OF THE
PACIFIC RAILROADS.
(i) NATURE AND AMOUNT OF GOVERNMENT AID TO THE
COMPANIES.
The Pacific Railroad Companies that have received aid
from the Government — as they now exist — consist of :
The Central Pacific Railroad Cottipany, with which the
Western Pacific Railroad Company has been consolidated, and
its several branches.
The Union Pacific Raihoad Company, with which the
Kansas Pacific Railroad Company and the Denver Pacific Rail-
road Company have been consolidated, and its several
branches, and
The Cefitral Braiich Union Pacific, and the Sioux City and
Pacific Railroad Companies; which, being of comparatively lit-
tle importance, will not require much of our attention.
All these roads were constructed under the Act of Congress
of July ist, 1862 (12 Stat., 489), and the Amendatorv Act of
fuly 2, 1864 (13 Stat., 356).
By the Act of 1862, there was granted to each of the bond
aided companies, in aid of construction, the right of way and
ten sections of public lands for each mile of completed road ;
and it was also provided that there should be issued to the
companies, for each section of forty miles of completed road,
bonds of the United States of $1,000 each, payable thirty years
from date, with interest at six percent., payable semi-annually,
to the amount of $16,000 per mile. These bonds, b}- the pro-
visions of the bill, were, ipso facto, upon their delivery, to con-
stitute a first mortgage upon the roads and equipment of the
— 5—
companies to secure the payment to the U. S., at maturity, of
the principal of the bonds, and also of the amounts paid by
the Government as interest thereon ; and the earnings of the
roads from the Government, for telegraph and transportation
services, and also, after completion, five per cent, of the net
earnings, were to be applied to the payment of the indebted-
ness of the companies to the Government.
By the Act of 1884, this Act was amended so as to require
only one-half of the compensation earned by the roads from the
Government to be applied to the debt ; and also, so as to per-
mit the companies 'to issue first mortgage bonds on their roads
and equipment equal in amount to the bonds received from the
Government, and constituting a prior lien thereto.
The aggregate amount of pecuniary aid received by the
Pacific Railroad Companies under these Acts is stated by Gov-
ernor Pattison, in his minority report, to be $447,729,470.54, —
as will appear from the following table, compiled from the
tables given by him :
Principal of subsidy bonds $ 64,623,512.00
Interest, at 6 per cent., accrued and to accrue to
date of maturity 114,261.247,50
Use until maturity of annual interest payments,
without interest, calculated on a basis of six per
cent 199,790,250.19
Valueof land grants, sold and unsold 65,983.583.61
Aid from other sources 3,077,877.24
Total $447,729,470 54
Deducting from this the total amount of the " aid
from other sources " 3,077.877.24
There remains $444,651,593.30
Which constitutes the value of the land and money grants
alone. (Rep. pp. 134-5)-
In explanation of the item, " Use until maturity of annual
interest payments," etc., it is to be observed that it was decided
by the Supreme Court of the United States, in U. S. vs. U. P.
R. R. Co., 91 U. S., 72, that the amounts paid by the Govern-
ment on account of interest were not to be paid back to the
Government by the companies until the maturity of the princi-
pal of the bonds ; and it is assumed by the Commissioner,
(perhaps incorrectl}^ v. in/ra, p. 19), that they are then to be
repaid without interest, — thus giving to the companies, for an
average period of fifteen years, the use, without interest, of all
the moneys paid by the Government to their use on account of
interest on its bonds.
The portion of the above amount given to the Central Pa-
cific Company amounts to $183,055,892.36, as will appear from
the following table :
Principal of subsidy bonds $ 27,855,680.00
Interest at 6 per cent., accrued and to accrue 49,248,924.41
Use until maturity of annual interest payments 86,118,706.71
Value of land grants, sold and unsold 19.832,581.24
Total $183,055,892,26
''Management Contemplated by Congress and Methods Actually
Pursued. ' '
' ' Had the Pacific railroads been built and managed upon
honest methods, had the Government loan been properly ap-
plied, these companies, regarded as a whole, could have de-
clared dividends at the rate of six per cent, per annum for eigh-
teen years from the date of actual completion to the present
time upon all moneys that they would have been required to
pay in to complete and equip the roads; they would have own-
ed 2,495 miles of roads, free from all debt and -worth $124,600,-
000, upon an original outlay of less than $34,490,381.44. Three
of them, the Union Pacific, the Central Pacific and Central
Branch, could have repaid every cent of the principal and in-
terest advanced by the Government to date, and could have re-
duced their charges to shippers to the extent of ^140,000,000,-
000, or nearly $8,000,000 a year. For one dollar the stockhol-
ders would have realized $1.70 in dividends in eighteen years,
and $1.11 in land sales. The property would have been free
from debt; and for every dollar they have invested, the stock-
holders would have had in property, $4; so that in eighteen
years each dollar would have yielded $6. 18."
"But they chose dishonest methods. At the outset they
divided $172,347,115 of fictitious capital; they dissipated over
$117,000,000 which should have been applied to the payment
of the principal and interest of the Government debt, and they
taxed shippers to the extent of over $140,000,000, or nearly
$3,000,000 a year to pay for the inflation of the capital of these
companies, and for the vicious practices that crept into their
management.''
"The Union and Kansas Pacific roads (aided portions)
could have been built for an original outlay by stockholders of
$17,021,488, in addition to the Government loan. All debts
could have been paid, including the Government debt, princi-
pal and interest to December 31, 1886, and from the profits of
operating the roads, and from land sales, aggregating $176, -
295,793.53, the stock could have paid regular devidends at the
rate of six per cent, per annum; and by an original outlay of
$17,021,478, which the law required, but which was not made,
the company would today own a railroad worth at least $79,-
000,000, and unsold lands worth $14,004,240, equalling an
appreciation of 447 per cent in eighteen years, while shippers
would have been benefitted, and the developments of tributary
territory encouraged by a reduction of $85,130,845.49 in
charges for transportation."
" In the Central Pacific for $16,609,203.7601 stock .subscrib-
ed, which should have been paid in conformity with the act of
Congress, all debts could have been wiped out, including the
Government debt, principal and interest; the stock would have
paid regular dividends at the rate of six per cent, per annum
and for the outlay of $16,609,203.76 the company would today
own a railroad worth at last $40,000,000, and unsold lands
worth $12,500,000, equalling an appreciation of over 206 per
cent in eighteen years, while shippers would have been bene-
fitted by a reduction of over $54,000,000 in the cost of tranvS-
portation." (p. 146.)
* 5K *
" Because of the vicious methods actually pursued by the
bond-aided companies, the government has been defrauded of
the bulk of its advances; shippers have been taxed to the
extent of over $548,000,000 and liabilities to the amount of
$389,517,265 have been heaped upon the properties." (p. 147.)
(2) METHODS OF CONSTRUCTION.
Their General Character,
The methods of construction adopted by the managers of
the Pacific Railroad Companies, as will be seen from the more
detailed statements given belo\/, were, in all cases, substan-
tially the same. All the roads were constructed and equipped
under contracts, allowing extravagant compensation, made by
the directors of the several companies with auxiliary construc-
tion companies, in which the directors were themselves the sole
parties in interest ; or — leaving out of view the fiction of inter-
vening corporations — under contracts made by the directors
with themselves, under which their compensation was fixed at
extravagant rates.
The general result is thus described by the commissioners :
' ' The explanation of the constant and restless discussion and inquiry
which has for years pervaded Congress, the press, and it may be said the
whole people of the country, in relation to these Pacific Companies, is
certainly due to the fact that there exists a settled conviction that,. by the
application of ingeniously contrived devices in the construction and ope-
ration of these railways, the bounty of the Government, intended for the
support, development and insurance of the financial strength of these
corporations, has been slowly but surely filtered into the pockets of a few
favorec^oflScers and managers, who have not scrupled to use their powers
as directors and trustees for their own personal advantage.
' ' It was the purpose of Congress, in all this, to provide for some-
thing more than a mere gift of so much land, and a loan of so many
bonds on the one side, and the construction and equipment of so many
miles of railroad and telegraph on the other. The United States was not
a mere creditor, loaning a sum of money upon mortgages. The railroad
corporation was not a mere contractor, bound to furnish a specified
structure, and nothing more. The law created a body politic and cor-
porate, bound as a trustee so to manage this great public franchise and
endowments that not only the security for the great debt due to the
United States should not be impaired, but so that there should be ample
resources to perform its great public duties in time of commercial disaster
— 8—
and in time of war." (p. 49) .
" The conclusion reached by this Commission, based upon their own
examinations of the officers of the respective companies, upon the exam-
ination- of the accounts of the companies by the experts of the Commis-
sion, and upon the report of the inspecting engineer of the Commission,
is that, with a single exception, to be presently noted, (the Union Pacific,
since the spring of 1884), all of the duties and obligations above referred
to have been constantly and persistently disregarded. The result is, that
those who have controlled and directed the construction and develop-
ment of these companies have become possessed of their surplus assets
through issues of bonds, stocks and payments of dividends voted by
themselves, while the great creditor, the United States, finds itself sub-
stantially without security for the payment of its loans." (p. 50).
These observations are fully substantiated by the accounts
of the methods of construction pursued by the managers of
the several companies, as detailed in the report, which are as
follows :
Construction of the Central Pacific R. R. ajid Bfanches.
The management of this company has continued un-
changed throughout its history, except of late years by the
death of members of it, and the substitution of their personal
representatives. It consisted of Stanford, Crocker, Hopkins
and Huntington, who, with five others, representing them,
were directors of the Central Pacific Railroad Company.
Mai7i Line — Sacramento to Ogden. (pp. 68-76).
The portion of this line ftom Sacramento to the Eastern
boundry of the State was constructed by Charles Crocker &
Company, in which Stanford, Crocker, Hopkins and Hunting-
ton were equally represented. Under the construction con
tracts, payments were to be made, five-eighths in cash, and
three-eighths in stock, at 50 cents on the dollar, or by a subse-
quent modification at 30 cents on the dollar.
From the State line to its terminus, five miles we.st ot
Ogden, with the exception of a small section of the road pur-
chased from iht Union Pacific Railroad Company, the railroad
was constructed by a corporation known as the Contract and
Finance Company, which had succeeded Crocker & Company,
and in which the sole parties in interest were the four directors
named, and one F. B. Crocker, whose interest was subse-
quently assigned to the four other parties. The terms of the
contract were substantially $86,000 per mile, one-half payable
in cash, the other one-halt payable in stock, for the construc-
tion and equipment of the road " Under this contract, the
road was constructed between the points indicated, a total dis-
tance of five hundred and fifty-two miles, at a cost of
$^3,726,000 in stock, and $23,726,000 in gold."
The efforts of the Commission to ascertain the actual cost
— 9—
of construction of the railroad to the Contract and Finance
Company were much cbstructed by the loss of the books of
that company, and of Crocker & Company; which, "in the
opinion of the Commission, were purposely destroyed by
direction of Stanford, Huntington, Hopkins and Crocker.
The evidence on this point, they say, appears to be conclusive."
In their judgement, however — which they regard as being
very near the truth, — " the actual cost of construction of the
Central Pacific Railroad, from Sacramento to Promontory
Point, and the purchase from the Union Pacific Railroad Com-
pany of 47^ miles, a total distance of 737.50 miles, did not
exceed the sum of $36,000,000."
This conclusion is based by the commissioners ' ' on the ex-
amination of many witnesses as to the actual cost of railroad
building and material during they ears of construction, on the
evidence taken of the character of the country, on the agreed
price paid by the Central Pacific to the Union Pacific for forty-
seven and one-half miles of the road between Promontory
Point and a point five miles west of Ogden," and, on " Mr. Stan-
ford's admission . . . that the $54,000,000 of stock dis-
tributed by the Contract and Finance Company was substan-
tially a net profit, subject only to the liquidation of the
indebtedness of the Contract and Finance Conpany, not ex-
ceeding $3,000,000." (Which indebtedness the Commission
are of the opinion from the evidence, did not exist).
The profits realized on the whole road from Sacramento to
Ogden were as follows :
On Sections 1 to 138 (Crocker & Co.)
In Cash $ 8,536,015.46
In Bonds 100,000.00
In Stock 14,701,710.28
$23,337,725.68
On balance of road to Ogden (Contract and Finance Co.)
In Cash »23, 726,000.0.1
In Stock 23,726,000.(0
S47,452.000.00
?70,789, 725.68
Actual cost of construction $36,000,000.00
Profits realized $34,786,725.68
The Western Pacific Railroad, (pp. 76-7).
The Western Pacific Railroad Company was organized in
1862. This road, with the exception of some work done by
previous contractors, was constructed by the Contract and
Finance Company, which received in payment all of the un-
issued stock of the company, all the unsold lands, all Govern-
ment bonds to be received, and all bonds of the Western
Pac fie Railroad Company remaining unsold.
The road of the San Francisco Bay Company, organized by
Stanford, Huntington, Hopkins, Charles Crocker and E. B.
Crocker, was also constructed bv the Contract and Finance
lO —
Company. For the work done, and materials furnished, it
received the sum of $3,265,000, of which amount $2,395,000
was paid in stock of the company. This company was consol-
idated with the Western Pacific Railroad Company on the basis
of a total authorized capital stock of $10,400,000. The West-
ern Pacific Railroad Company, thus consolidated, represented
123 miles miles of railroad, from Sacramento to San Jose, and
26^ miles of railroad of the San Francisco Bay Railroad Com-
pany, in all, 149^2 miles. It was received into the Central
Pacific Railroad, subject to a bonded indebtedness of
$4,804,000, and with a capital stock of $7,900,000, which was
exchanged, dollar for dollar, for stock of the Central Pacific
Railroad.
' * The actual cost of construction of this railway * * * is con-
tained in the books of the Contract and Finance Company, and there-
fore, cannot be accurately ascertained. Most of the construction was
through a country which presented no peculiar difficulties, and it may be
safely assumed that the entire stock converted into the stock of the Cen
tral Pacific Railroad Company represented no contribution whatever of
money or value, and that the cost of construction did not exceed the
bonded and floating indebtedness of the road." (pp. 76-7).
The San Joaquin Valley Railroad, (p. 77).
This road (leaving out of view the sum of $30,500 charged
to construction at the time of the consolidation of the Com-
pany with the Central Pacific Railroad Company), was built
under contract with the Contract and Finance Company,
which cannot be found. The payments for construction con-
.sisted of $6,087,000 bonds of the Central Pacific Railroad,
secured by mortgage upon the San Joaquin branch, dated
October i, 1870, and $2,087,000 of the capital stock of the
Central Pacific Railroad Company.
" These payments were made by the votes of vStanford, Hutuiti^loii,
Hopkins and Crocker, while they were owners and controllers of the
Contract and Finance Company, in the same manner as has been found
to apply to all contracts with the Contract and Finance Company."
California and Oregon Railroad, (pp. 77^80).
This road, from its intersection with the Central Pacific
railroad to Redding, was constructed by the Contract and
Finance Company — who received therefor $20,000 in goM and
$30,000 in stock — from Redding to Delta, a distance o' 48.38
miles, by the Central Pacific Railroad Company ; from Delta to
the State line a distance of 103 miles, bv the Pacific Improve-
ment Company — a corporation formed after the dis.solution of
the Contract and Finance Company, and in which Stanford,
Huntington, Crocker and the administratrix of Hopkins were
sole stockholders.
— II —
" The cqrsideration for the construction of these 103 miles of railroad
and of the equipment, as stated in the contract, was 80,000 shares of the
stock of the Central Pacific Railroad Company (|8,ooo,ooo), and
14,500,000 of the bonds of the Central Pacific Railroad Company. * *
The average market value of the Central Pacific stock, taken from actual
quotations from the New York Stock Exchange, during the month of
October, 1886, was I48. At this rate, the $8,000,000 stock was worth in
cash $3,840,000. The bonds paid the Pacific Improvemement Company
were worth par."
The actual cost of this construction, and of the equipment,
as shown by the books of the Pacific Improvement Company,
was $3,138,606.32, to which is to be added for work to be com-
pleted, $317,000, making the total cost $3,505, 600.32.
" In addition to the railroads hereinbefore described, which complete
the corporation known as the Central Pacific Railroad Company, a large
number of branch and auxiliary lines have been from time to time con-
structed by the Contract and Finance Company, the Western Develop-
ment Company, and the Pacific Improvement Company. These roads as
completed were leased to the Central Pacific Railroad Company. * *
To all these railroads the bond issue exceeds the actual cost of construc-
tion. These bonds, though nominally issued to the construction com-
panies, were, of course, the property of the stockholders, Stanford, Hunt-
ington, Hopkins and Crocker; and the result of the leases was to compel
the Central Pacific Railroad Company to pay the interest of these bonds
and in some cases dividends on the stock." (p. 80.)
"In the following table, we have stated the cost of the Central
Pacific Railroad, as that corporation exists today, as determined by us
from the evidence offered ; and also the consideration paid therefor in
bonds, stock and cash. " (p. 80).
— 12-
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__i3—
' ' The result is, that the Central Pacific Railroad paid for this con-
struction :
In cash $41,573,719.47
In bonds 18,713,000.00
In stocks .-. 60,585,810.22
Total $120,872,529.69
Total cost of construction 58,301,831.85
Leaving Surplus profits of $ 62,570,697.84 (p. 82).
' ' Of which there were :
Stocks $60,585,810.22
Bonds 1,984.887.62
Referring to a similar table showing the cost of construc-
tion and the amount paid for the leased railroads (which is
omitted), the Commissioners say:
' ' The result therefore is that the respective companies named in the
table paid therefore: —
In cash $ 28,686.00
In bonds 32,722,000.00
In stocks 49,005,800.00
Total $82,756,486.00
Total cost of construction 27,216,931.00
Leaving surplus profits of 55.539,554.99" (p. 82)
Construction of Union Pacific Railroad and Branches.
On this branch of the subject, the majority report adopts
" the results reached by the Wilson Committee as applicable to
the construction of the Union Pacific Railroad between Omaha
and Ogden, a distance of 1,029.38 miles" (pp. 50-1), which
were in substance as follows :
"The Union Pacific Railroad from Omaha to Ogden was constructed
under three contracts, known as the ' Hoxie contract, ' the ' Ames con-
tract, ' and the ' Davis Contract, ' by which, through the intervention of
assignments made by the holders of these contracts to trustees, and
through the intervention of a construction company known as the Credit
Mobilier of America, profits derived from these contracts were secured to
the officers and promoters of the Union Pacific R ailroad itself. The per-
sons who received these profits determined the amount thereof by their
own votes.
The result of these contracts was as follows :
Cost to Railroad Company :
Hoxie contract $12,974,416.24
Ames contract 57,140,102.94
Davis Contract 23,431,768.10
Total ?93..546,287.28
Cost to cnotractors :
Hoxie contract % 7,806,183.98
Ames contract 27,285,141.99
Davis contract ;.. 15,629,633 62
$50,720,958.94
142,825,328.34
To this should be added the amount paid Credit
Mobilier, on account of 58 miles % 1,104,000.00
Total profit on construction 143,929,328.34
"The actual cost of construction under these three contracts was sub-
stantially equivalent to the proceeds of the first mortgage bonds of the
company, and of the Government bonds."
—14
The Kansas Pacific Railroad, (pp. 54-65)-
The Commissioners give a detailed account of the financial
operations of this railroad, which, after becoming insolvent,
was acquired by Jay Gould ; and afterwards, by what was
called by them, an "extraordinary transaction." consolidated
with the Union Pacific.
The Consolidated Road.
The three years following the consolidation were years of
great business activity, and the gross receipts for the years
1 880- 1 883, both inclusive, were largely increased.
Tl e gross receipts f. r these four years were , $89,27.3,322.32
The operating expenses f. rihe same period 43,438,335.89
Leavine as net earnings 46,834.986.43
The interest and oth» r charges. Jess miscellaneous receipts
were $21,936,417.09
Dividends paid during the same years 15,643,448.13
Tttal 37,579,8G5.22
Leaving to accumulate as surplus 8,255,121.21
The Commission caustically reviews the connection of Mr.
Gould with the company, which, however, fortunately ceased
in 1883. (p. 66). It appears that by fraudulent manipulation
of the affairs of the company, and the extravagant dividends
paid during the period of his connection with it, "in the face
of the very large and apparantly profitable business indicated
by the foregoing figures . . . the Union Pacific Railway
Company found itself, early in 1884, o" the verge of bank-
ruptcy." (p. 67). Since then, in the opinion of the Com-
missioners, the company's affairs have been honestly and effi-
ciently managed.
Branch Lines, (pp. 65-68).
The branch lines of the Union Pacific Railroad, in the opin-
ion of the majority of the Commissioners, were constructed
with economy, and were a source of revenue, and a great ad-
vantage to the system, (pp. 56).
Construction of the Central Branch Union Pacific
Railroad, (pp. 96-102).
"The methods employed in the history of the construction of this
road diflFer from those applicable to the Central Pacific Railroad Com-
pany in this respect : In the case of the Central Pacific Railroad Com-
pany, the security of the United States was impaired by the distribution
of its stock without consideration, the exhaustive payment of dividends.
— 15—
and the diversion of its assets through construction contracts. In the
case of the several branches of the Union Pacific Railroad Company, the
result was attained by issuing a large majority of the first mortgage
bonds without the payment of any consideration to the company." (p. 98).
Construction of the Sioux City and Pacific Railroad.
(pp. 102-106).
' ' There are no construction books and no vouchers in exis-
tence from which any information can be gathered relating to
the construction of this road.'- (p. 102). The cost of con-
struction and the amount paid therefor, as well as they could
be ascertained by the Commissioners, will appear from the fol-
lowing table compiled from their report :
First mortgage bonds amounted to $1,628,000 00
J he government bonds 1.628.320 00
(apital stock 1,791,40J 00
Total $5,047,720 00
Actual cost of construciion between $2,500,000 and. ..$3,000,000 00
Profit on construction, at least $2,047,720 00
It appears from the minutes of the company that the first
mortgage bonds were divided up among the stockholders as a
dividend, (p. 103.)
Comparison of Capitalization, with actual cost, of the Pacific
Railroads, (pp. 137-140).
The above statements show how the assets of the several
companies were appropriated by the managers by means of
extravagant construction contracts, with the evident purpose,
and, possibly, the effect, of defeating the claims of the Govern-
ment for the repayment of the enormous sums loaned by it to
the companies. Important, however, as is this aspect of the
case, it is insignificant as compared with the evil effects of
excessive capitalization upon the interests of the people west of
the Mississippi river, in increasing transportation and freight
rates. This aspect of the subject is dwelt upon at length by
Governor Pattison in his report, and is illustrated by the tables
prepared by him, which, though to some extent covering ground
already passed over, are here given :
''The Union Pacific (1,038.68 miles) was built for $38,824,000, and
the company issued bonds and stock as follows :
First mortgage bonds $ 27,237,000 00
United States bonds 27,236,512 00
Land grant bonds 9,224,000 00
Income bonds 9,355,000 00
Stock 36,762,300 00
Total $109,814,812 00
Cost of construction $ 38,824.000 00
Fictitious capital $ 70,990,812 00
— 16—
"Onethinu^ is evident, after allowing for discount, the road was built
for less than the proceeds of the first mortgage and Government bonds,
which had a face value of 154,465,512, the builders taking as profit part
of the proceeds of the sale of those bonds, as well as the income bonds,
the land grants bonds, and the stock, and charging: up on the books of
the company as cost of construction, 1109,814,212," (p. 137.)
'• The, Kansas Paoific, aided portion (393.94 miles) was built for
about |i 1,800,000, under what was called 'an exhaustive contract,' which
took all the bonds and stock of the company, amounting to $25,028,250,
as follows :
First mortgage bonOs S 6,303,000 00
rnited States bonds 6,303,000 00
lAnd grants -. 1,574,750 00
Second land grant 1,500,000 00
Income 4,275,00<> 00
Stock 5,072.500 00
Total !J25.028,250 00
Cost of construction 111. 800.000 00
Motions capital !?l3,2iS2.50 0(^t (p. 138
)
"The Central Pacific actually received less than |76o,oooin cashjaud
bonds on account of stock subscribed, while it issued stock to the amount
of $54,000,000. The * * * aided portions (860.66 miles) were built
for 140,000.000, for which bonds and stock were issued by Messrs. Leland
Stanford. CoUis Huntington. Mark Hopkins and Charles Crocker, or
under their direction, as follows :
Bonds 9 70,2ll.6sa 00
Stock 54,000.000 00
Total issue of bonds and stock $124,211,680 00
Cost of construction 40.000,000 00
Fictitious capital 9 84,211,6S0 00 (p. 13S)
"The bonds reduced to a gold basis, yielded 152,708.742.56. So that
the four men who managed that company profited to the extent of over
|i 2,000,000, in addition to 152,000,000 of the stock, which they divided
among themselves and subsequently sold at high figures, after declaring
to the amount of $18,453,670.00." (pp. 138-9.)
" llie Sioft.r Cift/ and Pacific capitalized its road (101.77 miles) in
bonds and stocK to the amount of $5,047,720.00, as follows :
First mortgage bonds ?1,62S,000 00
United States bonds 1,6-28,320 00
Common stock 1.7i»l,400 00
Total ^ *5;O47,7-20 0)
Cost of construction 2,6'0,00J 00
Profit in bonds 92,447,720 00
" It (this company) distributed among its stockholders, without con-
sideration, over $2,400,000. of which $1,628,000 was in first niortgage
bonds and the remainder in government bonds. Every stockholcfer who
paid in I40 received in return alx)ut $120 in securities and property."
(P- I39-)
''The Central Branch Cornpant/ received $386,700 on account of
.stock issue of one million. This road (100 miles) was built for $2.731. -
347.23, for which bonds and stock were issued as follows :
First mortgage bonds 91.600,000 00
United States bonds 1.600,000 00
Stock, 1,000,0(^0 00
Total $4,200,000 00
Cost of construction . 2,731,347 23
Fictitious capital *1,468,652 77
—17—
"Of the first mortgage bonds, $400,000 was used for purposes that
no one has been able to explain ; $400,000 more in these bonds was given
away as bonus to stockholders for stock subscriptions.
"It will be apparent from these figures that the roads (i.e. the Pa-
cific Railroads generally) were bonded and stocked on an excessive basis,
the profits amounting to 1172,347,115 going to construction companies
or inside combinations."
Stock Illegally Issued.
From the above history of the methods of construction
pursued by the managers of the Pacific Railroads, it appears
that, except in the case of one of the smaller roads, all the
stock of the companies was appropriated by the directors,
under the construction contracts referred to, and that besides
other profits, the stock thus received was in all cases clear
profit. This was obviously in contravention of the second
section of the Act of July 2nd, 1864, by the provisions
of which money only was to be received for any such assess-
ment, or as equivalent for any portion of the capital stock
authorized.
" The Commission reports that this obligation has not been kept by
any of the bond-aided railroad companies."
"The capital stock of the Union Pacific Railway Company now out-
standing is $60,868,590. On this amount not more than sixteen per cent,
has been received in cash.
"The stock of the Kansas Pacific Railroad Company, before consol-
idation, was $9,687,900. Of this amount no part was issued for cash.
" The capital stock of the Western Pacific Company, before consoli-
dation, was ^,900,000. Not more than $200,000 was received by the
said company for this stock.
" The capital stock of the Central Pacific Railroad Company now
outstanding is $68,000,000. of this amount not more than $7,000,000
was issued for cash.
"The capital stock of the Central Branch Union Pacific Railroad
Company was |i, 000,000, of which $392,225.53 was received in
cash." (P. 106)
(3) SUBSEQUENT FINANCIAL MANAGEMENT OF THE PACIFIC
RAILROADS.
The net earnings of the Centjal Pacific, after deducting
" operating expenses," ** interest and taxes paid," and " Gov-
ernment requirements," are reported by the Commission to
have been as follows :
From 1863 to the 31st of Decemoer. 1869 ? 2,427.533 80
From the 1st of January, 1870. to the Slst of Decem-
ber, 1873, in which the latter year the first divi-
dend was paid 6,575,519 32
From the 1st of January, 1874, until the 1st of Janu
ary, 1884, which was. the end of the dividend-pay-
ing period of the company 52,5.36,91(> 99
1884. Net income 1,484.225 24
1885. '• " 1,861,63107
1886. " " 2,699,210 38
§67,585,1)46 80 (pp. 88-9 1 .
"During the period from January ist, 1874, to January ist, 18S4, the
— 18—
Central Pacific Railroad Company distributed to its stockholders in divi-
dends the sum of 132,308,055. But little stock was sold by Stanford,
Huntington, Hopkins and Crocker until 1S80. Between 1873 and 1877
they were substantially the only stockholders of the Central Pacific Rail-
road. Nearly the entire amount of dividends declared during these years
was, therefore, received by these four persons." (p. 87).
The balance of the net earnings (35,276,001.80), must
have been used in construction, either of the branch roads or
of the leased lines ; both of which were bonded by the parties
named for amounts in excess of their actual value. The
whole amount of net earnings must therefore be regarded as
appropriated by the directors named.
The earnings of the Union Pacific Railroad were as follows :
The earnings of the Union Pacific Railroad up to the
change in management in 1884 were as follows :
Gross earnings 1870 to 1879, inclusive % 109,017,067-79
Operating expenses, same period 5«.659,933.(>i
Net earnings 58,367,133.73 (p. 52).
Add net earnings 1880-1883, inclusive, as per
Table, sujn-a p. 14 45,438,986.43
Net earnings, 1870 to 1883, inclusive SlO:i, 800.120.10
Of which there was distributed in dividends:
From 1870 to 1879 14,mj,12...uu
From 1880 to 1883 15,«>43,448.13
Total *-^<> -^^ --' '••
II.
INDEBTEDNESS OF THE PACIFIC RAILROAD COM-
PANIES TO THE GOVERNMENT AND THEIR
PRfiSENT FINANCIAL CONDITION.
(i) INDEBTEDNESS TO GOVERNMENT.
The debts of the several companies to the United States at
maturity will be as follows :
Central Pacific Company :
Principal, including debt of Western Pacific Co $27,855,680 00
Int. at 6 per cent. 30 years— 180 pei cent 50,140,224 00— 77.996,904 00
Union Pacific Cornpanij :
Principal, including debt of Kansas Pacific Co $33,539,512 00
Int. at 6 percent, 30 years-180per cent 60,371,121 •')()— s*:;,'M0.633 60
Central Branch Union Pacific Company :
Principal Qf debt : | i.eoo.uo- uu
Int. at 6 per cent, 30 years- 180 per cent 2,880,ti00 00— 4,480,000 00
Sioux City a tut Pacific. R. R. Company :
Principal of debt $ 1.628,320 00
Int. at C per cent, 30 years— 180 per cent 2,930,976 00- 4,559,296 00
Total >180,945,833 60
—19—
From this amount the sums in the Treasury of the United
States to the credit of the sinking funds of the several com-
panies ($ ), are to be deducted.
In the above statement it is assumed by the Commissioners
that the payments made by the United States as interest on
bonds do not carry interest. But this is opposed to the general
rule that where money is paid to the use of another, interest is
to be charged. If interest is chargeable, the debts will be
increased by interest at 6 per cent for an average period of
fifteen years, amounting in the aggregate to $83,752,071.
(2) lylABILITIES.
The bonded debt of the Central Pacific company, as consoli-
dated, independently of the debt to the government, exceeds
the estimated cost of reproducing all these roads (except in the
case of the Union Pacific) and is as follows:
First mortgage, Series A, B, C and D $ 6,378,000 00
First mortgage, Series E, F, G, H and 1 19,505 00
California and Oregon first mortgage. Series A & B., 11,800,000 00
Western Pacifi.c Series A 1,970,000 00
Western Pacific, Series B 765.000 OC
Land grant first mortgage 4,570,000 GO
50-vear bonds of 1886 7,063,000 00
Sail Joaquin Vallev railroad 6.080,000 00
Calilornia state aid 284,000 00
San Francisco, Oakland and Alameda 687,000 00
Income bonds 3,285,000 00
Total $62,387,000 00
Government lien 27,856,000 00
Total funded debt $90,242,680 00
To which should be added interest due to United
Stateson bonds , 50,140,224 00
$140,382,904 00 (p. 24
The total funded debt of the Union Pacific Company, on the 31st day of December,
1886, exclusive of debt to the United States, is $81,969,127 50
Add debt to the U. S., principal J33,593,521 00
Interest 60,371,121 60— 93,910,633 0
$175,879,76110 (p. 23.)
The bonded debt of the Central Branch Union Pacific road is as
follows :
First Mortgage bonds $ 1,600,000 00
Funding bonds 630,000 00
Debt to United States : Principal $ 1,600.000 00
Interest 2.880,00l» 00 4,480,000 00
$ 6,710,000 00 (p. 2 6)
The bonded debt of the Sioux City and Pacific Company is as
follows
First Mortgage bonds .'. $ 1,628,000 00
Debt to United States : Principal $ 1,628,320 00
Interest'...' 2,920,976 00 4,559,296 00
$ 6,1 87,296 00 (p. 28).
(3) ASSETS OF THE COMPANIES.
The assets of the several companies, as reported by the
Commissioners, are merely the roads and equipments, consi.st-
20
ing of the subsidized lines, and the branch roads afterwards
constructed. In the opinion of the Commissioners, the value
of the former — with the exception of the Union Pacific — is
less than the amount of the first mortgage bonds. The latter
also are mortgaged to their full value. The mortgaged pro-
perty theretore constitutes no security for the debt. This ap-
pears fully from the detailed statement given by the Commis-
sioners, which is as follows :
The subsidized portion of the Ceyitral Pacific Railroad
extends to a point five miles west of Ogden, Utah, to Sacra-
mento, California, a distance of 737.50 miles, and from
Sacramento to San Jose, 123.16 miles. The latter line was
formerly known as the Western Pacific Railroad.
The Central Pacific embraces, by consolidation of date
1870, the following branches, viz.: ist, The San Francisco,
Oakland and Alameda Railroad, extending from Niles to Oak-
land, 24.31 miles. 2nd, The California and Oregon Railroad,
from Roseville, California, to the boundry of the State of
Oregon, 296.57 miles. 3d, The San Joaquin Valley Railroad,
from Lathrop to Goshen, 146.8 miles. Total mileage of
Southern Pacific Railroad, 1,357.29 miles, of which 860.77
miles are subsidized, and 495.52 miles are unsubsidized.
The value of the Central Pacific Railroad as at present con-
solidated, as estimated by Col. Morgan, is $1 10,000,000 ; but
'* this estimate, in the judgment of the Commission, is excess-
ive, and out of proportion with the cost of production as fixed
by Col. Morgan, which is $50,863,540." (p. 23).
The Union Pacific Railway proper consists of the main line
trom Council Bluffs on the Missouri River to a point five miles
west of Ogden (1,038.35 miles), and of the railways formerly
known as the Kansas Pacific and the Denver Pacific, the
aggregate length of which is 772 miles, of which only 393.94
miles next west of the MiSvSouri River were subsidized. Total
length of lines 1,815.57 miles, (p. 4).
Numerous branch lines in Kansas, Nebraska, Colorado,
Utah and Oregon have been constructed by this company, the
mileage of which exceeds the mileage of the main road.
'* The total mileage of the Union Pacific proper is, as above
stated, 1,832 45 ; the total mileage of the connecting branches
is 2,761.93 miles." (p. 11).
With reference to the latter, "it is suflBicient for the present purpose
to say that the system is operated as a whole ; that the branches and the
main Hne are mutually dependent on each other for support and devel-
opment, and that through this system they represent a vastly greater
earning power than would either the branches or main line itself were
they dismembered. IHie net earnings of the system taken for the past
three years (by which term is now meant their gross earnings less their
operating expenses and taxes) have averaged $9,800,000 ; of which sum
$8,200,000 should be credited to the parent line, and $1,600,000 to the
branch svstem.
— 21
"The actual value of the system, as gathered from Col. Morgan's
intelligent examination based both upon cost of construction, on the in-
creased value of terminal facilities and right of way, and also on a close
and critical examination of the earning power of the main line, may be
approximately stated at $150,000,000." (p. 11).
It would seem, therefore, frora the figures given in the re-
port, that this railroad, including branches, must, at this time,
be of a value very nearly equal to the Government debt, over
and above liens paramount to that of the Government, viz :
Value of road, as here stated §150,000,000 00 *
Bonded indebtedness, exclusive of debt to United
States (V p. 18, ante) 81,969,127 00
Net value ^8,030,873 oO
III.
LEGAL REMEDIES OF THE GOVERNMENT.
These will be, at the maturity of the bonds^ to foreclose the
Government mortgages, and then to subject the other assets of
the company, if any, to the deficiency judgment.
(I) FORECLOSURE.
The original lien of the Government extended only to the
subsidized portions of the roads of the several companies. But
by the 9th Section of the Thurman Act, approved May 7, 1878,
(20 Stat. 56), the lien is extended co all the property of the
companies, from whatever source derived, and will, therefore,
cover the branch roads, subject, of course, to existing liens. 1
In the opinion of the Commissioners the subsidized portion
of the Central Pacific from Ogden to San Jose is worth less
than the first mortgage bonds ; and the branch roads less than
the mortgages upon them at the time of their consolidation with
the main line. The only value of the lien of the Government
on this road will then consist simply in the power it gives the
Government over other competitors of acquiring the road. For
the collection of its debt it must look to the other assets of the
company.
The same observations will apply to all the other roads,
except the Union Pacific.
This road, it appears from the report, is worth, in excess of
all prior liens, more than half and probably not much less than
the whole of the Government debt. (See ante, p. 19.) An
offer was made to the Commission, by the parties interested, to
pay the Government, for the subsidized part of the road, $35,-
1. In the opinion of the Majority Commissioners this provision of the Act is
unconstitutional and void. Bnt no valid ground?; for this view can be ass gned and
the validity of the act is. ther--tv.r«i, assumed. The question, however, is not very
material. Whether the original lien extended to the branch lines or not, the judgment
lien will extend to them; aad, in the meantime, iintil such iudgment be obtained, Con-
gress can provide by appropriate legislation against the alienation of the property.
22 —
000,000 to extinguish its indebtedness ; and as the branches
seem to have been economically constructed, the value of the
whole was probably greater ; and since then, assuming the
same efficiency of administration to have continued, its value
has probably largely increased.
(2) DEFICIENCY JUDGMENTS.
The Majority Commissioners seem to assume throughout
their report that beyond the visible assets of the Pacific Rail-
road companies — that is, the roads and their equipments — there
are no assets from which the Government debts or any part of
them can be collected ; and this view seems to prevail almost
universally with the public.
With regard to the Union Pacific Company and the minor
companies, the opinion is possibly correct ; for the managers of
those companies — with a juster appreciation of the resources
of the law than seems to have characterized the managers of
the Central Pacific — lost no time in realizing the fruits of their
fraudulent management and retiring from participation in the
affairs of the company. They were doubtless originally respon-
sible to the companies, but many of them have probably become
insolvent, and those who are solvent may be protected as
against the company, and consequently also as against the Gov-
ernment, by the statute of limitations.
The Ce7itral Pacific Company.
But with regard to the Central Pacific Company, there is
no room to doubt that the whole, or at least the greater part,
of the amount due to the Government from this company, as
reported by the Commissioner — $76,995,904 — can be collected.
(Supra, p. 18).^
The management of this company has continued substan-
tially unchanged throughout its history. It originally con-
sisted of Stanford. Crocker, Hopkins and Huntington ; and it
now consists of the last named gentleman and the personal
representatives of the others, and Mr. Huntington and the
estates of the others are still in possession of the assets of the
company, fraudulentlj- appropriated; and profits fraudulently
realized by them, out of their trust ; and it is probable that their
estates are sufficient to satisfy the Gov^ernment indebtedness.
The sole question to be considered, therefore, is as to their
personal liability ; and that this question must be answered in
the affirmative is equally clear.
As to the facts, it is established beyond question by the
reports of the Commission that these gentlemen by contracts
made with themselves, and by other fraudulent methods, have
I. This observation is made on the assumption that no change has taken
place in the management since the date of the report. 1887.
—23—
appropriated the whole of the assets of the company, and
that this was done with the fraudulent intent of defeating the
collection of the debt due from the company to the Govern-
ment. They are, therefore, liable to the company, as in every
case of actual fraud ; and, independently of the doctrine of
actual fraud, they come directly under the familiar principle
that " where a trustee or other person standing in a fiduciary
character makes a profit by means of any transaction within
the scope of his agency or authority, that profit belongs to the
cestui que trust, and he is precluded from making any profit
which can only redound to his own benefit." (2 Spence's Kq.
Jur. 945.)
Upon this point it will be sufficient to cite the opinion
of the Supreme Court of the United States in the case of the
U. S. vs. The U. P. R. R. Co., 98 U. S. 609-10, where the
precise question was presented :
"The substance of the charge is, that the board of directors of the
railroad company made contracts for building the road, and for running
the Pullman cars on it, and for mining its coal lands and purchasing the
coal so mined, which were a fraud upon the company ; that these con-
tracts allowed exorbitant prices for work done and material furnished ;
that otherwise they were very advantageous to the other contracting
parties and injurious to the company ; that in all of them the directors,
or a controlling majority of them, were interested adversely to the com-
pany ; that in fact they were, in the name of the company, making con-
tracts with themselves as the other party. In short, it may be taken for
granted that, if these allegations are true, as they must be held on
demurrer, frauds more unmitigated than those set forth in this bill were
never perpetrated on a helpless corporation by its managing directors.
' ' That these frauds are such as a court of equity would relieve in a
proper case, may be seen in the opinion of the Circuit Court for the Ne-
braska district, in a suit growing out of the Wyoming Coal Compony's
contract. Wardelf t;.s. The Union Pacifie Co,, 4 Dill. 330."
The attempted justification of their fraudulent conduct by
the directors of« the Central Pacific simply serves to bring out
more strongly the applicability of the rule in question. We
quote from a written argument filed on their behalf before the
Pacific Railroad Commission, and referred to by the President
in his message transmitting the report :
" It is said," say the authors of this argument, " that they (the diree-
tors) violated a well known rule of equity in dealing with themselves.
That they were trustees and that they were representing both sides of the
contract. ' '
(But) "when it is said that they were trustees, if they did occupy
such relations, it was merely technical, for they represented only their
own interests on both sides — there being no one else concerned in the
transaction. They became the incorporators of the company that was
to build the road : subscribed for its stock and were the only subscribers.
Therefore, it is difficult to see how any one was wronged by their action.
The rule of equity invoked, which had its origin in. the injunction, 'No
man can serve two masters,' certainly did not apply to them, because
they were acting in their own interests and were not charged with the
duty of caring for others' rights, there being no other persons interested
in the subject matter."
—24—
The attempted justification, however, ignores the principle
that the corporation represents the interests of its creditors as
well as those of its stockholders, and ihat the former are even
paramount to the latter. Hence the directors are trustees
directly of the company and indirectly of its creditors as well
as its stockholders.
It is, therefore, well said by the President :
" When the relations created between the Government and the com-
panies by the legislation referred to, are considered, it is astonishsng that
the claim should be made that the directors of these roads owed no duty,
except to themselves, in their construction ; that they need regard no
interests but their own, and that they were justified in contracting with
themselves and making such bargains as resulted in conveying to their
pockets all the assets of the company. As a lienor the Government was
vitally interested in the amount of the mortgage, to which its security
has been subordinated. ' '
'• The doctrine of complete independence on the part of the directors
of these companies and their freedom from any obligation to care for
others' interests than their own in the construction of these roads, seems
to have developed the natural consequences of its application, portrayed
in the majority report of the Commissioners."
By the construction contracts, above referred to, the direct
ors received, in addition to other profits, the whole of the stock
of the company. This was directly in contravention of the
second section of the Act of 1864, and under that Act and the
general law, independently of the ground of fraud, the holders of
the stock are liable to be assessed tor its whole value, and under
a well settled and familiar practice in equity, any competent
court can make the assessment at the suit of the Government,
or any judgment creditor.
Upon this stock there was distributed by Stanford, Hop-
kins, Huntington and Crocker to themselves and the stock-
holders, in dividends the sum of $32,308,055. (p. 18, supra).
In making these dividends no provision was made for the pay-
ment of the debt to the United States, but the evident purpose
was to defeat this indebtedness and thus defraud the Govern-
ment. This amount, therefore, may be recovered both on
the ground of fraud, and on the ground that the stock was held
by the stockholders as constructive trustees of the company,
and that the dividends also inured to its benefit and were held
upon a like trust.
In addition there are many other instances given by the
Commissioners of misappropriation of the assets of the com-
pany. The books show the receipt by Stanford and Hunting-
ton of the sum of $4,818,335.67, for which no vouchers
appear. This, in ':he opinion of the Commissioners, was used
for the purpose of influencing legislation and other improper
purposes, (p. 84.) Stanford and Huntington are responsible
for it. The directors of the Central Pacific, in conjunction
with those of the Union Pacific, also paid in subsidies to the
Pacific Mail Steamship Company the sum of $4,000,000 ; an
—25— ;
illegal expenditure for which they are liable. Stanford,
Crocker, Hopkins and Huntington, together with Mills and
Tevis, also received in the year 1869 upon a contract made by
them as directors with Wells, Fargo & Company, one-third of
of the capital stock of that company, (which was $5,000,000),
which stock has ever since paid dividends at the rate of eight
per cent, per annum, (p. 83) and of which their share, with
accretions to date, cannot probably be worth less than $5,000,-
000. The total amount of the assets of the company misap-
propriated by them will then be as follows :
Profits of construction contracts !i*58,301,831.85
Dividends 32,308,055.00
Miscellaneous:—
Cash received lor which therp are no
vouchers $4,818,355.67
One-half cash paid to Steamshi p Co 2,0d0,000.00
Value of Wells, Fargo & Co. stock 5,000,000.00 11,818,355.67
Total $102,428,242.52
In the above table the stock is charged to the directors at
par, but if charged to them at its market value when feceived,
with interCvSt, it would amount to much more. Nor does this
table exhibit all of the indebtedness of the company on
account of misappropriated assets, but simply those which the
Commissioners were able or deemed it necessary to trace. The
funds and assets of the company were used in many other
ways by the directors as their own ; and, among other grand
operations, they constructed long lines of railroad which were
leased to the Central Pacific at exhorbitant rates, ($3,490,828
per annum, being 13 per cent on the inflated amounts at
which these roads were capitalized; p. 143). So that if
fully investigated the indebtedness of the directors to the com-
pany would be greatly in excess of the amount stated by the
Commissioners. Bu<^, as this amount is more than sufficient to
satisfy the indebtedness of the Government, it is needless to
pursue the subject further.
i
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